Gilles Moec Macrocast: Fiscal Standoff

Risks of a successful motion of confidence forcing the Prime Minister’s resignation are mounting in France. While the possibility of an ensuing “government shutdown” is very remote in our view, this puts the French fiscal issues again in focus. The 2025 initial budget bill was already ambitious, and the concessions already offered during the parliamentary process have made it even harder to deliver the 5% deficit target. More instability could have a knock-on effect on the economic outlook. Consumer confidence has already declined, and the savings rate could rise further, thwarting the rebound in consumption on which the government is counting to support tax receipts in 2025. 

If the budget is not adopted, requesting from parliament the right to roll-over tax at the same conditions as in 2024 would be the likely option. Between the freeze in income tax brackets and a nominal freeze in most items of public spending the rollover would entail, the absence of the planned discretionary measures for 2025 would not necessarily be too dramatic, but the trajectory would be in question. The 2025 budget is only a first instalment on a multi-year effort. If it is so difficult to get an adjustment of 1% of GDP across the line this time, then the chances of delivering anything meaningful next year would be materially lower, at least not without a political clarification. 

However, we note that despite the noise, and amid indications that some international investors have become less keen on French public debt, even last Friday the sovereign spread was only marginally out of its trading range of the last 4 months, and the absolute 10-year yield was lower than just before the dissolution of the National Assembly. This probably reflects the fact that France can count of large reserves of domestic savings. France is also lucky that there is no contagion from the US to the European bond market, and the latest dataflow points to further policy accommodation from the ECB. This reduces the short-term risks, but we reiterate the point we made last summer: following in the footsteps of Italy, with domestic savings increasingly directed to funding the government, can reduce potential growth by reducing the private sector’s access to finance.